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Traditional 401(k)/403(b)
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Roth 401(k)/403(b)
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Federal income tax treatment
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Contributions and earnings are taxable when withdrawn.
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Qualified distributions are tax- and penalty-free. (See Distributions below for more details.)
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Contribution limits
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The maximum contribution is $23,000 or $30,500 for participants 50 and older, in 2024. However, plans may set lower limits. The limits apply to all contributions combined, whether traditional, Roth or both.
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Same as traditional.
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Employer matching contributions
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Employer matching contributions are allowed if offered by the plan. Matching contributions are not included in income when made to the plan and are taxable when withdrawn.
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Same as traditional.
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Distributions (withdrawals)
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Distributions are taxable as ordinary income.
A 10% early withdrawal penalty may apply on distributions made before you reach age 59½.
If employment is terminated in the year you turn age 55 or later, withdrawals may be penalty-free but are still taxable.
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Qualified distributions are tax- and penalty-free if the first Roth contribution was made at least 5 years before and the participant:
For nonqualified distributions, earnings are taxable and may be subject to a 10% early withdrawal penalty.
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Required minimum distributions (RMD)
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Generally, you must take required minimum distributions beginning at age 72 or at retirement, whichever is later. Once withdrawals begin, RMDs must be taken each year.
To avoid RMDs during your lifetime, you can roll your account assets into a Roth IRA when you’re eligible to take distributions. You’ll be responsible for any unpaid taxes on the taxable portion of your rollover.
The SECURE Act increased the age when required minimum distributions (RMDs) must begin from 70½ to 72, effective for individuals turning 70½ on or after January 1, 2020. If you reached age 70½ before this date, you are still required to take RMDs.
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Same as traditional.
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Loans and hardship withdrawals
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Plans may allow loans and hardship withdrawals.
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Same as traditional.
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Effects on taxable income
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Taxable income is used in determining your tax bracket and eligibility for certain benefits, such as tax credits and financial aid.
Traditional contributions reduce your taxable income at the time of investment. However, distributions from traditional accounts are taxable as ordinary income.
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Roth contributions do not reduce your taxable income at the time of investment. However, qualified Roth distributions are not taxable.
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Options when employment ends
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When leaving your employer, your account balance can be:
Cashed out. Taxes and penalties may apply.
Rolled into a traditional IRA.
Rolled into a Roth IRA. The rollover is taxable but is not subject to the early withdrawal penalty.
Rolled into a new employer’s plan, if the plan accepts rollovers.
Left in your previous employer’s plan, as long as the balance stays above the required minimum ($5,000 or less, depending on the plan).
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When leaving your employer, your account balance can be:
Cashed out. Taxes on earnings and penalties may apply for nonqualified distributions.
Rolled into a Roth IRA.
Rolled into a new employer’s plan, if the plan accepts rollovers and Roth contributions.
Left in your previous employer’s plan, as long as the balance stays above the minimum required by the plan.
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